GOP Shifts on Fannie, Freddie Overhaul

Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.

Now, as Republicans prepare to assume control of the House next week, they aren't in as big a rush, cautioning that withdrawing government support in the housing market should be gradual.

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GOP Rep. Scott Garrett of New Jersey.
Associated Press

"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett (R., N.J.), incoming chairman of the House Financial Services subcommittee, which oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."

Fannie and Freddie, which buy mortgages from lenders and package them into securities that it sells to investors, were placed into government conservatorship in September 2008 after they nearly failed as losses from the housing bust started to mount. Keeping them afloat has cost taxpayers about $134 billion so far, and the companies' federal regulator estimates it could cost about $20 billion more. By comparison, the broader Troubled Asset Relief Program, which bailed out the rest of the financial industry, is projected to cost $25 billion.

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GOP Rep. Randy Neugebauer of Texas.
AP Photo

Cautious statements from key Republican members of the House Financial Services Committee are a shift from the debate over the Dodd-Frank financial overhaul last spring and summer, when Republicans blasted the Obama administration for omitting Fannie and Freddie from the bill.

Republicans were backing a bill by Rep. Jeb Hensarling (R., Texas) to start cutting the government's ties to the mortgage giants or begin winding them down in two years; if they were deemed financially viable, they would become fully private within five years.

"Of all the dumb regulation that caused our economic crisis, none was dumber than that which created the (Fannie and Freddie) monopolies," Mr. Hensarling said in March.

Democrats tend to favor a more active role for the government in housing to ensure that underserved communities have access to mortgages.

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GOP Rep. Ed Royce of California.
Zuma Press

Many Republicans now concede that a speedy exit may not be practical, because Fannie Mae and Freddie Mac have such a dominant position in the nation's housing market. Mr. Garrett said he has "not established a specific timeframe for winding them down."

Ever since the housing bubble burst, the federal government has been the main source of support for new mortgage lending.Fannie, Freddie along with the Federal Housing Administration and the Department of Veterans Affairs guaranteed nearly 90% of home loans made in the first three quarters of 2010, according to the trade publication Inside Mortgage Finance. A hasty end to the government's support of Fannie and Freddie would mean fewer Americans could get home loans, causing home sales and prices to drop even further and pushing taxpayers' cost for rescuing the mortgage giants even higher, said Rep. Randy Neugebauer (R., Texas), a former banker and housing developer who serves on the House Financial Services Committee. "You'd cause Freddie and Fannie to have even larger losses than they'd already have," Mr. Neugebauer said.

One way to lessen the government's role would be to reduce the maximum size of loans Fannie and Freddie can purchase. The amount is now set at $729,750 in high-cost areas such as New York and San Francisco. Reducing that limit could encourage more investors to purchase mortgage-backed securities that don't have the government's backing and therefore carry somewhat higher yields.

"At some point, you're going to have to put some pressure on the private market to start picking up that slack," Mr. Neugebauer said.

With home prices sinking, lawmakers and the Obama administration face intense pressure from the real estate and banking industries to maintain some federal support.

"We don't believe that the private market — right now — is willing or able to provide the liquidity that's necessary to get us out of this," said Joe Stanton, chief lobbyist for the National Association of Home Builders. "To erode that support right now would be a disaster," said Vince Malta, a real estate agent in San Francisco and a vice president of the National Association of Realtors. The Treasury Department's long-awaited proposal for overhauling Fannie Mae and Freddie Mac is expected to be released in January, and Republicans say they are eager to examine it. Administration officials have been weighing whether to include a some sort of federal backstop that could work like a catastrophic insurance fund to be used in the event of a housing market bust.

Republican lawmakers remain deeply skeptical.

"The Republican effort will be focused on diminishing the government guarantee, to the extent possible," said Rep. Ed Royce (R., Calif.). "In terms of where we end up, that remains to be seen."

Nevertheless, Republicans they say they want to compromise with the Obama administration and Senate Democrats on a plan that could pass a divided Congress next year.

Lawmakers shouldn't wait too long, Rep. Garrett said, because doing so would allow Democrats to argue that Fannie and Freddie should be kept alive as public-private hybrids. "There's a huge incentive to hash out a deal," he said. "This needs to be addressed yesterday."

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